Discussion Paper Series 2019-E-17

Tax Incentives for Investment: Evidence from Japan's High-Growth Era

Mariko Hatase, Yoichi Matsubayashi

Tax devices have occasionally been adopted as policy tools to promote economic growth in major industrialized countries after the Second World War. In Japan, various accelerated depreciation schemes under the name 'special depreciation' were employed as major devices to stimulate investments. In this paper, we manually collect firm-level data series in the heyday of the device from the mid-1950s to the early 1970s. The findings from firm-level data are as follows: the aggregated special depreciation hit two peaks when the schemes were expanded, applying special depreciation tax incentives prevailed among listed companies, and the actual amounts varied across firms with strong upward biases. A detailed examination of each firm's financial statements indicates that each firm retained its discretion when applying the scheme and sometimes chose not to enjoy the full benefits. An empirical analysis reveals that firms with relatively less capital to labor tended to use larger special depreciation, hinting at the probability of intended effects of policy devices. Increases in the number of designated machines for the scheme--once considered to represent its inefficiency--actually activated the usage of schemes by firms.

Keywords: Capital investments; Corporate taxes; Special depreciation; Investment policy; High-growth era

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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